Loopholes may be good for reducing a tax burden, but they can be pretty bad when you fall into one.

Hemopet, which operates a canine blood bank, greyhound rescue and veterinary diagnostic laboratory in Garden Grove, Calif., is exempt from taxes because of its nonprofit status. When W. Jean Dodds, DVM, founded the operation in 1986, she thought that included sales tax.

But now California authorities are demanding that Hemopet pay $82,000 in sales tax on blood provided for transfusions, a liability that Dr. Dodds’ husband, retired patent attorney Charles Berman, said puts the operation at risk of closing.

“We don’t have the finances,” Berman said.

Hemopet, Dodds said, supplies more than 40 percent of the blood used by California veterinary practices, dog owners and breeders. It also sells its blood products nationwide.

The organization carved out a niche for itself by rescuing retired racing greyhounds and using some of the dogs to periodically donate blood. After 12 to 18 months, the greyhounds are put up for adoption or moved to foster care.

With the organization’s future at stake, Dodds, 75, and Berman, 72, have gone to the state Capitol in Sacramento to lobby politicians. It’s been an up-and-down battle, and the couple recently got news that may help them, at least partially.

Hemopet’s first experience with tax auditors seemed to verify that the operation should be exempt. Around 1992 the Orange County Assessor’s Office approached Hemopet to assess a property tax. Dodds and Berman appealed to the state Franchise Tax Board, which cleared Hemopet from paying any taxes, comparing the organization’s work to what the American Red Cross does for people.

And because blood products are tax-free under California law, Hemopet should be just as exempt as the Red Cross, the board found.

The next go-around was roughly five years ago, when a state auditor stopped in and asked, “Why aren’t you paying sales tax?” recalled Berman.

The auditor examined records from 2008, 2009, 2010 and 2011 and declared that Hemopet owed $82,000 in sales taxes on transfusion blood. The state argued that the tax code exempted human blood but said nothing about animal blood.

The couple appealed, and while they won the support of tax board members, the response was that a change in state law was needed to include animal blood banks.

That’s when Board of Equalization member George Runner reached out to state Sen. Janet Nguyen, a Republican from Garden Grove. Nguyen quickly authored Senate Bill 898, which would amend the tax code.

The bill passed the state Senate unanimously but then hit a speed bump in the Assembly Revenue and Tax Committee on June 27. Some members felt it was fine to exempt future sales, but they did not want to waive the past taxes.

The committee approved the bill, but not before removing wording that would have canceled Hemopet’s $82,000 debt.

The bill had yet to reach the full Assembly when a glimmer of hope came Aug. 8, just weeks before the legislative session concludes.

Darryl Lucien, spokesman for Assemblyman Sebastian Ridley-Thomas, who chairs the Committee on Revenue and Taxation, said a compromise is possible.

“We are going to permit the author to amend the bill to authorize [payment of the debt] over a very extended time period,” Lucien said.

The specific time frame remained unclear.

“It’s not a full resolution for us but I think it helps us,” Berman said. “It’s a step in the right direction but not a perfect solution.”

Perfect, he said, would have been to cancel the debt and the accrued interest, which he estimates totals roughly $100,000.

And if Hemopet has to pay the full amount upfront?

“The risk is that we’re going to have to close,” Berman said.

He said the diagnostic operation does well financially but that Hemopet still runs an annual $100,000 deficit. He and Dodds have covered past losses.

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